At the beginning of every Chinese New Year AsianInvestor makes 10 predictions relating to economic, geopolitical or investment issues that will affect how investors make their major decisions. Then, at the end of the year, we look back to how accurate these predictions were.
Our second revisiting of our Year of the Pig predictions focuses on a question around private asset classes, otherwise known as alternative assets.
How much will Asian asset owners add to alternatives?
Answer: Around 10%
As we reported last year, institutional investor interest in illiquid, private assets has been rising as they seek out both diversification and yield. This rising interest in private equity, private debt, real estate and hedge fund investments looks set to continue, to the point that it is predicted to become a $14 trillion market in global assets under management by 2023, according to alternative asset data provider Preqin.
Across the region, asset owners have been raising their exposure to real estate, private equity, private debt and infrastructure, while some keep a small allocation in hedge funds too. The likes of Government Pension Investment Fund (GPIF) of Japan has expressed a desire to slowly build a 3% to 5% allocation in private assets, while across the region life insurers have looked to private debt and infrastructure debt, while sovereign wealth and pension funds have additionally targeted real estate and private equity possibilities.
Korea's pension funds are perhaps the most exposed to alternative assets; some leading funds have exposures of 40% to over 50% of their respective AUMs in some cases.
As we noted last year, it's hard to offer a general figure of exposure, given the variety of countries and asset owners in the region. But our estimate was that asset owners would, on average, increase their existing alternative asset exposures by 10%, meaning a pension fund with a 10% exposure would raise it to 11%.
This probably turned out to be a little optimistic. While funds across the region continue to show interest in alternative assets, regular equities and debt offered some appealing yields during 2019. And the overall asset growth of most mainstream pension funds and life insurers, courtesy of growing economies and more people saving for retirement than retiring, meant asset owners could keep raising their allocations to alternatives, while keeping it broadly neutral as a percentage of overall AUM.
As markets likely slow somewhat this year, the appetite for private assets is likely to remain strong. However, it's likely to take several years for regional institutional investors (Korean pension funds aside) to build their exposure to the sort of 20% weighting that many of the world's leading pension funds hold.
Previous Year of the Pig reflection articles: